Amanda Morrall finds out why buying a new car might actually make sense and explores the downside of borrowing for those with debt

By Amanda Morrall

Buying a new car has long been considered a major personal finance faux pas made even worse of course by borrowing.

Depreciation on that shiny new car and the interest paid on loan repayments made for poor, if not stupid, consumerism.

Why buy new when you could buy a cheap used import from Japan that was still in good nick?

The case against borrowing to buy remains ironclad; however the winds of change are in the air when it comes to the economics of buying new.

Tighter control and higher standards against emissions spewing imports, discounting in the auto sector, on-going improvements in safety, and the efficiency and reliability of smaller model vehicles are serving to make a good case for dealers specialising in new, and not just for the rich.

Press motoring editor Dave Moore says there's never been a better time to buy new. The latest data on car sales supports this view.

Car sales for April 2012, saw a 25% increase from the year earlier.

'Perfect storm' driving sales

While ma and pa New Zealand have contributed to the car buying bonanza over the past year, Moore is quick to point out that the bulk of sales have been driven by commercial buyers who have been deferring fleet upgrades because of the downturn. That's had the effect of generating a striking headline figure.

"We're coming into a perfect storm where fleets and car hire companies that kept them a bit longer are going on a buying spree.''

Although the spike in new car sales may be owing to a commercial catch up, Moore said the motoring public will undoubtedly be buying new over used in increasingly larger numbers.

On one hand there is a drying up of cheap imports from Japan. That's being driven by new emissions regulations and standards. As a result, new cars will hold their value longer than usual, so depreciation isn't the curse it used to be for the consumer.

The standard "free fall" in that first year and a half has slowed dramatically, said Moore.

On top of that, advancements in technology mean that new cars are more efficient and safer than ever. Given the average cycle of a new car is four to five years, buyers of used cars older than five years are potentially trading safety for savings.

"The equipment and safety improvements in those cycles are massive and safety is sexy these days,'' said Moore.

Moore said the trend back to smaller, more fuel efficient cars has also driven down cost to the point where a good  new vehicle can be purchased for NZ$20,000.

"A car now in the mid $20,000s is now really desirable, and not just ordinary.''

Andrew Bayliss, motoring advice manager for the New Zealand Automobile Association, upholds Moore's view that "new cars have never been as affordable as they are today.''

In a recent report for AA, Bayliss compared the price of a basket of cars 20 years ago to today's prices and found little price change.

"Not only is it relatively more affordable, you're getting a three year warranty and service plan, better fuel efficiency, and improved safety.''

"So there's a lot of benefit to buying new.''

Can you have your cake and eat it to?

And the disadvantage?

The strongest case against buying new relates to financing and the interest you pay to borrow which could potentially be used to service other debt; that is, the mortgage. But can you have your new car and fast-track the mortgage too?

Interest.co.nz publisher David Chaston has crunched the numbers to show the effect of a different range of scenarios.

On a NZ$30,000 loan (at an interest rate of 11.95%) over 48 months, a borrower could expect to pay NZ$813 a month. The total interest paid would work out to be NZ$8,130 not including a NZ$900 fee you could expect to pay for a finance company loan. (11.95% is probably the best car loan rate you could get, and for many people that rate will probably be higher.¹)

If you put that NZ$30,000 on to your mortgage, and assuming your mortgage had another 15 year to run, then the extra payments might be as low as NZ$255 per month. For many people, a repayment burden of NZ$255 is much better than the finance company's NZ$813 per month.

What's not to like? Plenty, it turns out. If all you did was up the payments to NZ$255 per month, after the 15 years you will have paid NZ$15,861 in interest - and that is way more than the NZ$9,000 or so under the finance company option.

A smarter way would be to borrow the money on your mortgage, but up your repayments by NZ$706 per month. That way, you will pay off the car-loan portion of your mortgage in four years and the extra interest paid is only NZ$3,885 over that time.

It's even smarter to leave your repayments at the higher NZ$706 level when the car-loan portion is paid off. That would shorten the rest of your mortgage from 11 remaining years to 8 remaining years, and save you a further NZ$14,435 in interest. It's not the rate you pay, its the rate you pay it off.

Before you buy:

*Do you home work: Calculate the running cost of your car.  The New Zealand Automobile Association in its upcoming report will profile a range of models (three years old) and their related costs including registered, warranty of fitness, servicing and petrol based on an average use of 14,000 kilometres.

*Don't buy to impress. Evaluate your own needs and choose a car that meets your requirements.

*Save on fuel; having your car regularly serviced, the correct air pressure, driving the speed limit, not carting about excess, unnecessary cargo and using the air conditioning sparingly will help to save on fuel. Not being a lead foot at the lights will also reduce fuel consumption.

*Discount where possible. Use your grocery dockets to save on fuel costs or else the new AA Smartfuel card which gives you instant savings at the pump and also gives you the option to accumulate those credits which can be used to buy a full tank of gas.

*Do the math. If you are borrowing to buy, put down the largest deposit you can afford and pay off the loan in the shortest amount of time to reduce the long-term cost of interest.

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Note 1: Don't be fooled by car company special low interest offers. "Special financing packages for 4.95%" and the like. They only work because the car dealer sells you the vehicle for a higher price than they otherwise would, that extra being the lost interest on the financing deal. There is no free lunch here. Car financing is a risk-related transaction and actual interest rates are 11.95% to over 20% depending on the security you can give and your income/job situation.